“The mistake would be in not viewing evolution of payments as a growth story for all stakeholders – service providers, governments, merchants and consumers – because everybody has so much to gain,” said a participant at our #NAMA Community meet on the payments ecosystem held in New Delhi on July 31. This discussion was supported by FTI Consulting. Read the rest of our coverage of the community meet here.
A participant noted that governments around the world – both, as a payer and acceptor of electronic payments – are recognising the importance of digital payments to combat shadow economy. Also, consumers today are demanding friction less, faster payments with seamless as well as safer payment options.
[Note that the discussion was held under the Chatham House Rule, where comments may be reported, but without attribution. We’ve also moved the sequence of comments around, to further protect the identity of the individuals who spoke.]
Notes from the discussion, mostly paraphrased (quotes have been edited for clarity):
What are the trends shaping digital payments?
1. Digital technologies
Advancements in data processing, the transmission charges have enabled payments to achieve scale, lower cost right, and respond on a very dynamic fashion to the consumer’s preferences, said a participant.
“In 2017 alone, global payments revenues around the world accounted for $1.9 trillion which is the largest revenue growth in the last five years. The current growth rate leads analysts to predict that the industry will approach $3 trillion globally by 2023; you can see the rapid pace at which this is evolving. Clearly the consequence of data technologies is coming to play in this whole digital evolution.”
2. Nationalism, populism and bilateralism
Globalism is giving way to populism and bilateralism. This is in direct opposition to the inevitability of what the networks are looking to do by connecting the world by virtue of scale, efficiency and the value and the benefit because nationalism and isolationism in rhetoric and in action, a participant noted.
“Around the world governments are moving to protect themselves from unpredictability of trade, national security issues, and economic policy. World leaders are re-assessing their own roles and and how to protect their citizens. So, we are moving away from the multilateralism to nationalism, populism and bilateralism.”
We saw the US withdraw from the Trans Pacific Partnership (TPP) and the deprioritisation of the multilateral trade and services agreements which again removes an important barrier against nationalist policies in payments, said a participant.
3. Emergence of big economies, companies and privacy issues
We have the emergence of big nations like China, India, and companies like Google, Facebook, Ali Pay on the world stage that have access to vast amounts of citizen information; that coupled with evidence of poor privacy protections is causing governments to take a much deeper focus on cyber security, privacy issue, and data protection, a participant noted.
“We’re seeing the rise of big players in data protectionism. So, this is the outside role of influencers of certain markets and maybe certain companies in raising the stakes on how data is collected, how data is managed and how it is protected and monetised.”
4. Local payment systems
“Governments are also developing local payments systems to enable digital payments. We’ve seen the success of, We Chat Pay and Ali Pay in China. In India, we have got Google Pay, Samsung Pay, Apple Pay, and others in this space, that are looking to get into the digital payments and electronic payment system.”
5. Governments, economy, society – everyone benefits
“Governments are leveraging digital payments for economic advancement because it helps them meet their own economic and societal objective.”
An IMF study of 150 countries found that on average, 32% of a country’s GDP can go untaxed with shadow economy. Countries around the world lose trillions of dollars in revenue annually due to their inability to effectively tax their markets. Digital payments are the means to be able to get rid of those adverse consequences, said a participant.
“Digital payments are helping grow national GDP between point two to one percent. We have also seen what the Jan Dhan Yojana scheme achieved here in India.”
“It’s not just about access, it’s about usage.”
You can only do so much and how do you go and create drive acceptance. In India, there has been a phenomenal increase in digital payments post demonetisation. What took us forty years to get to 1.2 million terminals in the country have today more than doubled post demonetisation, a participant noted.
Policy making for digital payments: key considerations
1. Maintaining commercial order in a borderless world
i) Global and domestic interoperability aren’t in opposition: The idea in maintaining inter-operable payments, that’s globally inter-operable and also inter-operable in terms of function and across sectors, and this idea of enabling domestic systems, national payment systems, aren’t against one another, noted a participant.
Benefits of global interoperability: “We think about fully inter-operable systems and they tend to be borderless, enable cohesive payments ecosystems and increased efficiencies, typically low operating costs; and they dramatically improve the customer experience by connecting customers and other end users together through the network that delivers the most benefits to the most stakeholders.”
ii) Faster progress on global standards: We need faster progress in adopting ISO ’20 or ’22, which is the global messaging standard for inter-operability within payments. These are all standards that improve the overall operation, said a participant.
“The adoption of these global standards is progressing, though a little bit slowly. But the risk is that if you don’t continue down this path in a rapid fashion, then we end up with an infrastructure that’s fractured instead of an unified globally inter-operable payment ecosystem; it doesn’t have consistent regulation, it doesn’t have consistent standards, it doesn’t have consistent principles; and the global standard looks more like an archipelago of it’s parent systems.”
iii) Government aiming to control national payment systems is tricky: As the government demonetised and replaced cash, they naturally wish to control national payment systems. Therein lies the risk of not being open and inter-operable as one would develop a domestic ecosystem. It’s about how looking at what’s happening in our own economy, within our own market, said a participant.
“The government should make sure that they are a willing participant in the global inter-operable ecosystem, make the right connections and put in place consistent standard regulations and policy.”
2. Data governance: data localisation isn’t the solution
i) Security standards are more important than local storage of data: The instinct to retain data within borders has gained full attraction where the focus of the discussion is around privacy, security, surveillance, and law enforcement, a participant said.
“It’s not about where the data sits, it’s about the processes that have been put around that data to protect it. So, it’s not about putting data in a location, but about data being ring-fenced by the appropriate processes and agreed upon standards and environments and procedures.”
ii) GDPR is the standard to approach data governance and privacy: A lot of countries are adopting data privacy regulations similar to the GDPR (General Data Protection Regulation). Countries like Brazil, China, Indonesia, South Korea, Vietnam, all have replicated GDPR for their own use, a participant noted.
“GDPR is well thought through and effective. It is the level that we have to aspire to because it sets the precedent of how we need to approach data privacy.”
3. Increase financial inclusion of MSMEs
i) MSMEs are important: In India, small businesses employ ninety percent of the workforce and to achieve a healthy growth in this sector is absolutely critical, said a participant.
“Small, medium businesses all seem to face the same set of challenges and pain points around maintaining customer relationships, staff performance, inventory management, supplier payments, working capital and choosing between cash and digital system for payments.”
ii) Digital payments will increase financial inclusion of MSMEs: The best way to give working capital to MSMEs, is to allow them to take out small loans. But, they can’t do that without a digital fingerprint, without a financial fingerprint or financial history. So, by using digital payments, we can bring small businesses to the financial mainstream, a participant said.